American Express Financial Advisors has been rotating out of a shorter-maturity Treasury position and into an aggressive overweight in spread product, on the view that Federal Reserve easing will proportionately benefit longer-duration MBS and corporates, according to portfolio manager Colin Lundgren. Lundgren and his team have sold some $840 million in Treasuries over the past seven weeks from their $7 billion portfolio, concentrated entirely within the two- and three-year sectors, and will purchase up to an additional $300 million in MBS and corporate bonds as the year develops. Central to this trade is Lundgren's belief that the bond-market has priced in "a lot of bad equity news," and that short of a major recession, he anticipates yields rising, especially within the short end of the curve, as the Fed eases an additional 100 basis points.
In the mortgage arena, Lundgren reasons that up-in-coupon trades, from 6.5-7% conventional 30-yearFannie Mae and Freddie Mac pass-throughs into the 7.5-8% stack, is the way to capture convexity. He also likes the 15-year sector--"dwarves" and "nuggets"--because they are slightly less prepayment sensitive than 30-year bonds. In the corporate portfolio the team is credit driven, playing only benchmark, liquid names. An example of a recent purchase was 7.45% Ford Motor Credit bonds of '31 (A2/A), which he found both attractive at 250 basis points off the curve, as well as defensive and liquid enough. Lundgren notes that although the team passed on the jumbo recent France Telecomm offering, he is monitoring the sector for an entry point. Similarly, he is seeking to take the portfolio from a 3% weighting in junk to 5% the year, although like Telecomm, he has yet to determine when.
The Minneapolis-based fund has an asset allocation of 45% MBS, 30% corporates (27% investment-grade), 9% Treasuries (entirely in the long end), 6% agencies and 5% cash. At a duration of 4.4o years, the fund is slightly short its benchmark, the Lehman Brothers Aggregate, whose duration is 4.58 years.
